The Quest for Prosperity: How Developing Economies Can Take Off - Updated Edition

Praise for The Quest for Prosperity

This is a must-read for anyone interested in the emerging consensus on development policy. Justin Yifu Lin makes a powerful case for a ‘new structural economics’ grounded in a very persuasive analysis of the evolution of ideas in economics. It will resonate especially well with practitioners familiar with the practical constraints of policymaking in developing countries.

Montek Ahluwalia   deputy chairman of the Planning Commission of the Republic of India

In this masterpiece, Justin Yifu Lin weaves together 250 years of economic thought with his own wisdom acquired during China’s economic rise. He dares to envision the end of world poverty and spells out—thoughtfully, sensibly, and pragmatically—how this can be accomplished. It is impossible for an economist to write a better, or a more important, book.

George A. Akerlof   Nobel Laureate in Economics

Combining valuable insights from his experience in China, his time as the World Bank’s chief economist, and the 2008 financial crisis, Justin Yifu Lin’s recommendations for development policy reflect an impressive and unique personal journey.

Kemal Dervis   vice president of the Brookings Institution and former executive head of the UN Development Programme

"The Quest for Prosperity is an important book. Written with verve and clarity, it reflects a deep understanding of global economic issues, and proposes practical solutions that anyone concerned with the plight of the world’s poor would be wise to read."

Robert Fogel   Nobel Laureate in Economics

"Justin Yifu Lin’s life journey has been one of discovery driven by insatiable curiosity. His invaluable contributions to economic theory and policy in these turbulent times are distinctive because of the sharpness of his observations, his willingness to rigorously test a hypothesis, and his courage to posit emerging views. The Quest for Prosperity builds on his already substantial contribution to development economics. It is a must-read for all policymakers and students."

Trevor Manuel   minister in the presidency of the National Planning Commission of South Africa

Justin Yifu Lin lays out an innovative framework for understanding the mystery of economic growth, drawing insightful conclusions about the experience of successful economies that should provide important inspiration to developing countries as they seek to expand their comparative advantages and design their own growth strategies.

Ngozi Okonjo-Iweala   finance minister of Nigeria

Justin Yifu Lin cracks the code of economic development in this extraordinary tour de force—offering a rare combination of personal experience, rigorous analysis, and empirical investigation. His powerful recipe will become an enduring feature of future development efforts.

Stephen S. Roach   former chairman of Morgan Stanley Asia and author of The Next Asia

Part personal narrative, part sophisticated economic analysis, this important book offers a new approach for accelerating economic development around the world. Justin Yifu Lin’s exceptional grounding in Chinese realities and Chicago economics, as well as his extensive experience, shine throughout.

Dani Rodrik   author of The Globalization Paradox: Democracy and the Future of the World Economy

This is a truly exciting book. Speaking directly to the reader and quoting Lewis Carroll as easily as Simon Kuznets, Justin Yifu Lin proposes a new approach to development economics that makes great sense.

Thomas C. Schelling   Nobel Laureate in Economics

This book is a tour de force: a seminal contribution to development studies that is engagingly, even entertainingly, written. Lin uses words, not statistics, to carry his arguments; and he illuminates abstract ideas with the dicta of people as diverse as Winston Churchill, Deng Xiaoping, and Mick Jagger.

Robert Wade   London School of Economics and Political Science

THE QUEST FOR PROSPERITY

THE QUEST FOR PROSPERITY

How Developing Economies Can Take Off

JUSTIN YIFU LIN

with a new preface by the author

PRINCETON UNIVERSITY PRESS

Princeton and Oxford

Copyright © 2012 Justin Yifu Lin

Requests for permission to reproduce material from this work should be sent to Permissions, Princeton University Press

Published by Princeton University Press, 41 William Street, Princeton, New Jersey 08540

In the United Kingdom: Princeton University Press, 6 Oxford Street, Woodstock, Oxfordshire

OX20 1TW

press.princeton.edu

All Rights Reserved

Second printing, and first paperback printing with a new preface by the author, 2014

ISBN 978-0-691-16356-7

The Library of Congress has cataloged the cloth edition as follows

Lin, Justin Yifu, 1952–

    The quest for prosperity : how developing economies can take off / Justin Yifu Lin.

        p.    cm.

    Includes bibliographical references and index.

    ISBN 978-0-691-15589-0 (hardback : alk. paper)

    1. Developing countries—Economic conditions.    2. Developing countries—Economic policy.    I. Title.

HC59.7.L41863    2012

338.9009172’4—dc23

2012016049

British Library Cataloging-in-Publication Data are available

This book has been composed in Minion Pro with Knockout display by Princeton Editorial Associates Inc., Scottsdale, Arizona

Printed on acid-free paper. ∞

Printed in the United States of America

10 9 8 7 6 5 4 3 2

CONTENTS

Preface to the Paperback Edition    ix

Prologue    xix

An Intriguing Offer    xx

Strange Childhood Memories from Africa    xxi

1   New Challenges and New Solutions    1

The Bane of Excess Capacity    3

The Apparent Mystery of Economic Success    5

Taking Einstein’s Joke Seriously: A New Structural Economics    8

2   A Battle of Narratives and Changing Paradigms    13

Giving Meaning to One’s Life    14

The Evolution of Growth    17

Deciphering the Mystery of Poverty and Wealth    20

Robert Lucas and the Drycleaner’s Daughter    26

Explaining Convergence and Divergence    29

Development Thinking: A Tale of Progress, Waves, Fads, and Fashion    33

The Frustrating Search for New Answers    42

The Need for New Strategic Thinking    45

3   Economic Development: Lessons from Failures    49

Viability as the Hidden Ingredient to Economic Success    52

The Political Economy of Dreams and Ignorance    61

Do Not Look Where You Fell but Where You Slipped    67

Not Throwing the Baby Out with the Bathwater    71

4   Lessons from Successful Catch-up Countries    76

Squaring the Circle: The Contribution of The Growth Report    78

Recognizing That Some Countries May Have Found the Holy Grail    85

Modern Economic Growth: The Secret of Advanced Countries    97

5   A Framework for Rethinking Development: A New Structural Economics    102

Why Burundi Is Not Switzerland    104

Understanding Economic Development: A Conceptual Framework    108

The Optimal Speed and Sequencing of Prosperity    112

Putting New Wine in New Bottles    117

6   What Would Be Done Differently under the New Structural Economics?    121

Fiscal Policy: Free Airplanes, Railroads, and Bridges?    123

Money to Impoverish—or Money to Enrich    127

Surviving Wealth: Public Revenue Management in Resource-Rich Countries    130

Financial Development: Those Bankers We Love to Hate    136

The Need for Poor Countries to Choose Their Type of Foreign Capital    139

Sorting Out the Paradoxes of Trade Policy    141

Deciphering the Mysteries of Human Development    143

7   Putting the New Structural Economics into Practice: Two Tracks and Six Steps    147

To Identify or Not to Identify: That Is the Question    149

How to Identify Industries with Latent Comparative Advantages: A Few Principles    154

A Practical Guide for Sequencing Structural Transformation    158

8   The Peculiar Identities and Trajectories of Transition Economies    179

Imaginary Confessions in Heaven: The Politics of Reforms    181

Back to Earth: The Economics of Multiple Distortions    190

Options for Economic Reform: Big Bang or Gradualism?    195

Thriving Transitions: Lessons from China, Slovenia, and a Few Other Countries    201

9   Fostering Structural Change at Higher Levels of Development    209

Fighting Off the Middle-Income Curse    214

Keeping Pace with the Times    221

GIF Principles and Continued Structural Transformation    224

Understanding the Economics of Wealth and Greatness    229

10   A Recipe for Economic Prosperity    234

Understanding the True Nature and Causes of Economic Development    237

Industrial Policy in Action    242

Being Too Cautious: The Greatest Risk of All    246

Glossary    251

Notes    259

References    287

Index    309

PREFACE TO THE PAPERBACK EDITION

I am lucky to have been the World Bank’s first chief economist from the developing world. Considered the highest public job for an economist, it traditionally was occupied by well-known economists from advanced countries. I was also lucky to experience two development miracles. Born in 1952 in Taiwan, which was as poor as most African countries then, I moved to Mainland China in 1979. By that time Taiwan had achieved a miraculous transformation to become a newly industrialized economy. Mainland China, however, was then as poor as when I was born and poorer than almost all African countries. But it achieved a miraculous transformation similar to Taiwan’s.

The two experiences convinced me that poverty is not destiny. Even though a nation may be trapped in poverty for centuries, it can change its fate and start on a dynamic path toward transformation.

The World Bank’s dream is a world free of poverty. When I accepted the offer to become its chief economist, I was inspired to draw on my experiences to contribute to the realization of that dream. As a Chinese intellectual, educated in Confucian tradition, I have been inspired to contribute my knowledge to the modernization of my motherland since I was young. The World Bank position gave me the privilege of interacting with many leading intellectuals in developing countries, and I was encouraged to find that they all shared the same inspiration for their nations. And no matter where I travelled in my World Bank capacity, I found that the peasants and workers in the developing world had the same desire to prosper as the peasants and workers I grew up with in Taiwan and Mainland China. They all hoped to have a better life for themselves and their younger generations through their own hard work.

The national leaders I met on various Bank missions were also keen to know how to bring prosperity to their nations. Fundamentally, they are rational and hope to stay in power. And if staying in power is not in question, they hope to have good names in their nation’s history. The best way to achieve both goals is to bring prosperity to their people. But except for a lucky few, the results have been disappointing in most developing countries, where poverty still prevails.

When I was younger, I thought there was a holy sutra in the western advanced countries. I thought that once I learned it and applied it to my motherland, I could help my country to develop and my people to enjoy life as affluent as in advanced countries. But in its transition from a planned economy to a market economy, China violated almost all basic principles for a well-functioning market economy, dictated in the mainstream theories I learned in my PhD courses at the University of Chicago. A prevailing view among academics in the West in the 1980s and 1990s was that the right approach for the transition was to eliminate all distortions simultaneously in a big bang, as encapsulated in the Washington Consensus. The worst possible approach to follow was gradual piecemeal policy changes as practiced in China.

Should I have criticized the Chinese government, as many economists in China and the West did, for not eliminating all distortions, causing many undesirable consequences, such as widening income disparities and wide-spreading corruption, as predicted by the mainstream view? Or should I have been open-minded and appreciated the Chinese government’s approach as a rational agent attempting to do its best under its various constraints? I opted for the second, and the results were intellectually rewarding.

In 1994 I published a book, The China Miracle: Development Strategy and Economic Reform.¹ The analysis for the book helped me understand that the distortions before China’s transition had the purpose of protecting many nonviable firms in old priority capital-intensive industries that went against the country’s comparative advantages. The gradual, piecemeal, dual-track approach provided transitory protections and subsidies to firms in the old priority sectors, but facilitated the entry of private firms to comparative advantage following labor-intensive sectors. That allowed China to simultaneously achieve stability and dynamic growth.

The analysis in that book also predicted that removing all distortions by privatization, marketization, and stabilization, as advocated by the Washington Consensus, would cause the collapse of firms in old priority sectors and lead to widespread unemployment and social and political instability. And for fear of those dreadful consequences or for the purpose of retaining those advanced industries for national security or pride, many governments would have to reintroduce various disguised distortions and interventions to protect the now-privatized firms at costs much higher than the previous distortions and protections.²

The results of the reforms in socialist and nonsocialist countries in the 1980s and 1990s were consistent with the predictions of The China Miracle. The few successful economies, including China, Vietnam, and Laos, which started their transitions in the 1980s, and Mauritius, which started its transition in the early 1970s, all adopted the gradual dual-track approach—the worst possible choice from the viewpoint of mainstream economics. Countries following the approach recommended by mainstream economics had two lost decades, with slower average annual growth in the 1980s and 1990s than in the 1960s and 1970s and more frequent crises.³

The need to rethink the prevailing economic theory through the lens of realities in developing countries is borne out from their development efforts. After gaining political independence from their colonial bosses or emerging from the spheres of influence of western industrial powers, developing countries started to pursue their industrialization and modernization under their own national leaders. The mainstream ideas in the 1950s and 1960s advised the developing countries to build up the large-scale modern, capital-intensive industries prevailing in developed countries at that time. The logic seemed convincing. Unless labor’s productivity reached the same level as in high-income countries, no country could enjoy the same income as in high-income countries. Modern large-scale industries were perceived as necessary for any country to have the same labor productivity as the high-income countries at that time.

The inability of developing countries to establish those industries spontaneously was seen as a result of market failures. So, the recommendation from the mainstream was for the government to overcome the market failures by mobilizing and allocating resources directly to build up those large-scale capital-intensive industries directly through the (now defamed) import-substitution strategy. Countries following this strategy enjoyed a few years of investment-led growth, but stagnation and crises soon followed. The few economies that achieved miraculous transformation, most in East Asia, followed instead the wrong approach: to develop traditional small-scale, labor-intensive industries for export.

Theories are constructed to help us understand the causes of the phenomena we observe in the world and to advise us on how to transform the world for the better. It is a fact that the prevailing theories in modern times have been advanced mostly by theorists living in the advanced countries. But as I have learned, there is no holy sutra in the advanced countries! Why? One reason is that the prevailing theories in the advanced countries, like fashions, change from time to time. Another is that the validity of a theory depends on the conformity to its preconditions. But the conditions in developing countries in most cases are different from the assumptions drawn from the conditions in advanced countries. So, if a government in a developing country follows the prevailing theories from the advanced countries to formulate its policies, the results can be the opposite of what the policies were intended to achieve.

Economists in developing countries need to understand independently the causes of phenomena and to propose policies based on their understanding if they want to be a constructive force in their countries’ efforts to modernize. The Quest for Prosperity: How Developing Countries Can Take Off is the result of such an effort. In this book, I advise my fellow colleagues in the developing world to revert to Adam Smith—not to The Wealth of Nations, which presented his research findings, but to his approach to research, as exemplified in the full title of his book, An Inquiry into the Nature and Causes of the Wealth of Nations. The nature of modern economic growth, highlighted by the continuing increase in per capita income in a country, is a process of continuing enhancements in labor productivity. Making that possible are structural changes in technology and industries, which reduce factor costs of production and increase output values in the economy, and in infrastructure and institutions, which reduce transaction costs in the economy.

I am convinced that any developing country can start immediately on a path to a dynamic structural transformation and growth even though endowed with poor infrastructure and business environment. Its government has to adopt a pragmatic approach to use its limited resources and implementation capacity to facilitate the technological innovation and development of industries in which it has comparative advantages so as to keep its factor costs of production comparatively low. To reduce the transaction costs for firms in those industries, it can create industrial parks or special economic zones with good infrastructure and a supportive business environment.

Take China. At the time of its transition to market economy in 1979, its business environment was poor,⁴ the infrastructure was very bad, and the investment environment was harsh.⁵ The advice from the Washington Consensus was to improve everything for the whole nation simultaneously in one big bang without favoring specific sectors and regions. Instead, the Chinese government mobilized its limited resources and implementation capability to build special economic zones and industrial parks. Within the zones and parks, the infrastructure bottlenecks were relieved, and the business environment was made very competitive.

Although the labor costs were low at the beginning of its transition, China lacked knowledge about how to turn that advantage to produce labor-intensive goods with acceptable quality for export. To overcome those difficulties, the Chinese governments at all levels and regions approached prospective foreign investors and encouraged them to make investments in their special economic zones and industrial parks. With that approach, China rapidly developed labor-intensive light manufacturing to become the world’s factory. The success in those localized zones produced resources and conditions for the government to improve infrastructure and eliminate distortions in other parts of the economy. This was the secret recipe for development success not only in China but also in other economies in East Asia.

The quick success of Huajian Shoe Factory in Ethiopia shows that the recipe can also work in other developing countries. To promote such a pragmatic approach when I was at the World Bank, I commissioned a study entitled Light Manufacturing in Africa in 2010. According to the research, the wage rate in Ethiopia’s footwear industry was an eighth to a tenth of that in China and about half that in Vietnam, while its labor productivity was about 70 percent of that in China and almost the same as Vietnam’s. So Ethiopia was highly competitive in the footwear industry, for which labor costs were about a quarter of total costs in China. But in 2010 there were 19 million workers in footwear in China, 1.2 million in Vietnam, and 8,000 in Ethiopia.

The late Prime Minister Meles Zenawi of Ethiopia, informed by those findings and by China’s approach to industrialization during our meeting in March 2011, came to Shenzhen in August 2011 to invite Chinese shoe manufacturers to invest in Ethiopia. Managers of Huajian, a designer shoe manufacturer, visited Addis Ababa in October 2011 and, convinced of the opportunity, opened a shoe factory in the Eastern Industrial Park near Addis in January 2012. With an initial workforce of 550 Ethiopians, it quickly expanded to 1,800 in December 2012 and 3,500 in December 2013, with projections reaching 30,000 by 2016. By the end of 2012 Huajian had more than doubled Ethiopia’s shoe exports.

Before 2012 Ethiopia and almost all other African countries had difficulty attracting export-oriented foreign direct investment in light manufacturing. The immediate success of the Huajian shoe factory helped transform foreign investors’ impression of Ethiopia as a potential manufacturing base for exports to global markets. The 22 factory compounds in Bole Lamin—a new industrial park constructed by the Ethiopian government in Addis Ababa, with 8 built and 14 yet to be built—were leased to export-oriented factories in just three months in 2013. This phenomenal success occurred despite the fact that Ethiopia’s overall business environment, as measured by the World Bank’s Doing Business Indicators Ranking, deteriorated from 125 in 2012 to 127 in 2013.

Developing countries, including those in Sub-Saharan Africa, do not have to wait until all conditions for development are made ready. As this book promotes, they can immediately start on a path of dynamic structural transformation and poverty reduction if their governments use their limited resources and implementation capacity to facilitate the development of sectors in which they have comparative advantages. If governments can adopt such a pragmatic approach, the pending relocation of 85 million manufacturing jobs from China will enable almost all low-income countries to grow as dynamically as China and other East Asian countries have in the past decades.

After more than three decades of dynamic growth, China is now at a stage where its labor costs have been rising rapidly—from $150 a month in 2005 to $500 in 2012, and in coastal regions to more than $600 in 2013. China will have to follow the path of the earlier successful economies in East Asia, beginning to relocate its labor-intensive industries to low-income countries.⁶ Indeed, this is already happening. A large share of China’s outward foreign direct investment in Africa, which reached $9.3 billion by the end of 2009, has gone to manufacturing (22 percent), second only to mining (29 percent). And China is building economic and trade cooperation zones in Egypt, Ethiopia, Mauritius, Nigeria, and Zambia.⁷

I am delighted that The Quest for Prosperity has received excellent reviews. Martin Wolf, the chief economics commentator of the Financial Times, wrote: This is ambitious, because it has been the holy grail of economics since its inception. It is remarkable, because he largely succeeds. Clive Crook of Bloomberg used this title in his 18 December 2012 review: An economics masterpiece you should be reading now, and described the book as The most valuable new book I’ve read this year.

I am also delighted to find that the ideas promoted in The Quest for Prosperity have been appreciated by many practitioners in developing countries. President Paul Kagame of Rwanda extended his visit to China for two days in September 2012 so that we could discuss how to apply such ideas to Rwanda. Prime Minister Hailemariam Desalegn of Ethiopia, instead of discarding the old plans formulated by predecessors in many countries, reassured me during my visit to Addis Ababa in January 2013 that the active investment promotion program started by late Prime Minister Meles Zenawi would be continued and strengthened. President Jakaya Kikwete of Tanzania invited me to advise him on how to develop light manufacturing in a new industrial park during our meeting in Dar es Salam in February 2013. President Ellen Johnson Sirleaf of Liberia invited me to do the same during our meeting in Abujia in March 2014. President Macky Sall of Senegal, in appreciation of my contribution to the ideas of economic development in developing countries, awarded me Commandeur dans l’Ordre national du Mérite de la République du Sénégal in our meeting in January 2014.

I hope the publication of this paperback edition will make the ideas in the book accessible to more readers in the developing world and help achieve the dream of a world free of poverty.

Justin Yifu Lin

April 2014

References

Chandra, V., J. Y. Lin, and Y. Wang. 2013. Leading Dragon Phenomenon: New Opportunities for Catch-up in Low-Income Countries. Asian Development Review 30(1): 52‒84.

Crook, Clive. 2012. An Economics Masterpiece You Should Be Reading Now. Bloomberg, December 18, 2012. Online at: http://www.bloomberg.com/news/print/2012–12–18/an-economics-master.

Easterly, William. 2001. The Lost Decades: Developing Countries’ Stagnation in Spite of Policy Reform 1980–1998. Journal of Economic Growth 6: 135–157.

Lin, Justin Yifu. 2012. From Flying Geese to Leading Dragons: New Opportunities and Strategies for Structural Transformation in Developing Countries. Global Policy 3(4): 397–409.

Lin, Justin Yifu and Guofu Tan. 1999. Policy Burdens, Accountability, and the Soft Budget Constraint, American Economic Review: Papers and Proceedings, 89 (2), 426–3.

Lin, Justin Yifu, Fang Cai, and Zhou Li. 1994. The China Miracle: Development Strategy and Reform. Shanghai: Shanghai People’s Publishing House and Shanghai Sanlian Sudian, 1994; Hong Kong: the Chinese University of Hong Kong Press, 1995 (English edition).

MOFCOM. 2013. China Africa Economic and Trade Co-operation 2013. Online at: http://english.mofcom.gov.cn/article/newsrelease/press/201309/20130900285772.shtml.

Wolf, Martin. 2012 Pragmatic Search for Path to Prosperity. Financial Times, October 14, 2012. Online at: http://www.ft.com/intl/cms/s/2/a6c9aba2–12d2–11e2-ac28–00144feabdc0.html#axzz2yP5dD2mg.

World Bank. 2010. Investing Across Borders 2010. Washington, DC: World Bank.

———. 2013. Doing Business Indicators 2013. Washington, DC: World Bank.

Endnotes

1. The Chinese edition of the book was published by Shanghai People’s Publishing House and Shanghai Sanlian Sudian, 1994, and the English edition was published by the Chinese University of Hong Kong Press, 1995.

2. Lin and Tan 1999.

3. Easterly 2001.

4. In 2013, after more than three decades of market-oriented reform, China still ranked low in the Doing Business Indicators: 91 in the world. See: http://www.doingbusiness.org/rankings.

5. In the World Bank’s Investing Across Borders 2010, China’s investment environment was ranked the worst among the 87 economies covered in the study. See: http://iab.world-bank.org/~/media/FPDKM/IAB/Documents/IAB-report.pdf.

6. Lin, 2012; Chandra, Lin, and Wang 2013.

7. MOFCOM 2013.

PROLOGUE

WHEN A SENIOR WORLD BANK OFFICIAL PHONED ME from Washington, D.C., in January 2008 to offer me the position of senior vice president and chief economist of the World Bank Group, I was in the middle of spring break, busy preparing my teaching and research priorities for the next semester and attending to various economic policy matters. I was not expecting the call, but it was not a total surprise—two months before, I had met with World Bank President Robert Zoellick in his hotel room in Beijing for an hour and a half, an hour longer than scheduled, when he was visiting China. It was not a formal job interview—at least it did not feel like one at the time. The stated purpose was to discuss China’s inflation, widening income disparities, rural development, and other domestic issues. In response to Zoellick’s inquisitive mind, polite manner, and eyes burning with intensity, I gradually extended the discussion to the main challenges facing the world economy, the way to achieve more inclusive growth and reduce poverty, the potential role of foreign aid and multilateral organizations, and many other issues. At the end of the meeting, I gave him a copy of my Marshall Lectures delivered at Cambridge University a year earlier.¹ It summarized my research on economic development and transition issues in China and other countries.

An Intriguing Offer

The job offer was both exciting and humbling. Being asked to serve presented an extraordinary opportunity and was a sign of changing times. For the first time since the World Bank was created in 1944, a national from a developing country was being invited to serve as its chief economist, guide its intellectual leadership, and shape the economic research agenda of the institution. To meet the challenges of development, the institution had to be an agent of change. To be effective in this role it must combine its finance with ideas and knowledge. The development economics vice presidency, which I was being asked to lead, increases understanding of development policies and programs by providing intellectual leadership and analytical services to the Bank and the broader development community. Its aim is to improve the effectiveness of Bank operations and meet the needs of its client countries for high-quality services.

But giving up my exciting work—even momentarily—was not easy. I had served for 15 years as professor and founding director of the China Centre for Economic Research at Peking University. In those years I had developed strong and fruitful relations with many students, colleagues, and friends, some of whom counted on me in pursuing fascinating research questions. I had also been closely involved in economic policy discussions in China since coming back home in 1987 after four years completing a Ph.D. at the University of Chicago and a year of postdoctoral research at Yale University. Our remarkable economic success was a source of both pride and intellectual curiosity. I was eager to continue working on the increasingly challenging issues facing China. In an environment in which many prominent economists were predicting difficult times ahead, it was quite tempting to stay home and contribute to the debate and search for solutions.

At the same time, the World Bank offer was a lifetime opportunity to work on development issues in many different contexts, and perhaps to shape the global conversation on growth and poverty reduction strategies. The broad responsibilities of the position include helping accelerate poverty reduction and contribute to progress toward the Millennium Development Goals by providing countries with the knowledge necessary to make more informed policy choices. That knowledge has also been used over the years to inform global public advocacy initiatives. And developing it involves research, data, analysis, global monitoring, projections, statistical capacity building, and policy review and advice.

The development economics vice presidency covered all these dimensions, sponsored research projects in other parts of the Bank, and produced flagship reports to set the agenda of international development as well as two top scholarly journals in the field. It had among its staff some of the world’s best-known development economists. And economists who had been World Bank chief economists were among the most respected names in the field: Nobel laureate Joseph Stiglitz, Larry Summers, Stanley Fischer, Anne O. Krueger, Hollis B. Chenery, Michael Bruno, Lord Nicholas H. Stern, and François Bourguignon. Following in the footsteps of such people would be a great honor—and a daunting responsibility.

Helping countries to attain sustained dynamic growth to eliminate poverty and achieve prosperity has been my life’s pursuit since I was a child. I realized that joining the World Bank would allow me to share my insights on this subject with many others, undertake an ambitious research program to examine unresolved challenges in economic development, and shed new light on the causes of economic take-off or lagging growth in poor regions.

Indeed, the Bank had made an intriguing offer, one I could not refuse.

I asked for a week to think through what moving to Washington would mean for my personal and professional life. I needed to organize a leave of absence from the university and to make arrangements for my Ph.D. students and my successor. But I was ready for the challenge.

Strange Childhood Memories from Africa

A week after I took the position in June 2008, I was on a flight to South Africa, Rwanda, and Ethiopia. It was not my first trip on the continent, but in many ways it was an initiatory journey. Why not go to Latvia, Mexico, or Nepal for my first official trip?

Why Africa? Probably because I saw the continent as the last frontier for development economics, the place where new knowledge and new solutions could yield the greatest payoffs. Thanks to much-improved macroeconomic policies, higher commodity prices, and significant increases in aid, capital flows, and remittances, economic growth south of the Sahara had accelerated from 3.1 percent in 2000 to 6.1 percent in 2007. Similarly, per capita growth in gross domestic product (GDP) had increased from 0.7 percent a year over 1996–2001 to 2.7 percent a year over 2002–08. The proportion of Africans living on less than $1.25 a day had fallen from 58 percent in 1996 to 50 percent in 2005. The prevalence of deadly diseases such as AIDS was stabilizing and even declining in some countries. Sixty percent of the children were completing primary school, and child mortality was falling in a large group of countries.

A new wave of empirical research by development agencies, academic institutions, and leading economists from various backgrounds even suggested that several African economies were on the verge of an unprecedented economic take-off.² The strong performance and resilience of these economies were not accidents but the results of sustained efforts in most countries in the past two decades. At least five fundamental changes were at work: more democratic and accountable governments; more sensible economic policies; the end of the debt crisis and changing relationships with donors; the spread of new technologies; and the emergence of a new generation of policymakers, activists, and business leaders.³ And the security situation was also improving.⁴

True, the development challenges were still overwhelming. Many African economies still exhibited signs of limited structural transformation, reflecting the slow progress since independence. The region was overwhelmingly rural in 1960, with agriculture accounting for some 40 percent of GDP and 85 percent of the labor force. Although the rural share of the population fell steadily over the past five decades, it was still 63 percent in 2000, significantly higher than in other regions. A World Bank study noted:

Economic growth has not been accompanied by an increase in productive employment—particularly troubling since 7–10 million young Africans enter the labor force every year. A skills deficit hinders Africa’s ability to compete in the global economy, and opportunities for African entrepreneurs, especially women, remain constrained by limited access to information, innovation, and adequate tools to create viable businesses. . . . Because of its high dependence on rainfed agriculture, Africa is vulnerable to extreme weather events such as faster desertification, rising sea levels, and more frequent droughts. Africa may be the continent worst hit by climate change. The delivery of basic services continues to fail poor people—with high degrees of teacher absenteeism in schools and money often failing to reach frontline service providers.⁵

The continent also performed poorly on governance indicators and lagged behind on infrastructure development, with major deficits in transport, roads, water, telecommunications, and energy. Private investment averaged only 15 percent of GDP due to the continent’s infrastructure deficit and business regulations. Africa’s market share of global exports had declined from 3.5 percent in the 1970s to 1.5 percent in 2008. In addition, the global economic crisis, coming on the heels of the food and fuel price crises of 2008, was threatening the hard-won progress. Still, I felt there was ground for optimism about the continent’s economic future. Looking beyond the complex difficulties at hand, I had a sense that hope was back and that perhaps a little push in the implementation of good policies could bring the same positive results observed elsewhere in the developing world, most notably in Asia.

I started my field trip in South Africa by attending the Annual Bank Conference on Development Economics, a gathering of academic and policy researchers working on development issues. President Thabo Mbeki opened the meeting, with some 800 researchers from all over the world in attendance. I gave a speech based on my Marshall Lecture at Cape Town University. I argued that the best way to reduce poverty and to have dynamic, inclusive growth is to take a country’s comparative advantage as the guiding principle in its economic development. That allows the economy to be most competitive and to create the most jobs for the poor. Trevor Manuel, minister of finance of South Africa, chaired the session, commented on my speech, and became a supportive friend.

I then went to Rwanda to explore the constraints and opportunities for harnessing the country’s potential for growth, especially in the rural sector. In the eastern province I visited farmers’ cooperatives for agribusiness, mushroom production, and technology extension. I also met with government officials, including President Paul Kagame, a tall, serious